Wednesday, October 18, 2006

Reducing Oil Demand

Continuing on from Monday's posting on the political dimensions of US energy security, let's look at the demand side of the equation, leaving supply for a subsequent posting. Although we frequently talk about energy security and energy independence, we usually mean oil security, because that's where we have our greatest exposure to imports, unstable regimes, the Middle East, depletion, and all the other things that make us nervous about our energy future. And when we talk about oil usage, we really mean transportation, because that's where about two-thirds of America's oil consumption ends up. So the demand side of the energy security question boils down to whether and how we can reduce the amount of oil we use in transportation. The US has struggled to answer that question for my entire adult life, because it goes to the heart of not just our economy, but our way of life.

As complex as this question is politically, it breaks down into two very simple elements, which I've discussed on this blog many times: reducing current consumption by changing consumer behavior, and reducing future consumption by improving the efficiency of our oil-based transportation systems. Both of these paths face enormous obstacles, but every initiative designed to address oil demand must incorporate at least one of them. It's a tossup which poses the tougher challenge: the socio-political inertia around our present patterns of fuel use, or the high capital costs and slow turnover of our large base of existing vehicle fleets, both personal and commercial.

In terms of changing behavior, our society responds best to economic signals. This summer we got a clear signal that gasoline was tight, and we reacted by driving less and buying fewer heavy, inefficient vehicles. Right now, we're receiving a signal that gas is more plentiful, and while SUV sales may not rebound, it's a good bet that discretionary driving will. Policy makers have multiple tools available for altering these signals and the behavior that follows them--some low-tech, some high-tech--including higher fuel taxes, oil floor-price taxes, parking taxes, congestion taxes, time-of-day road tolls, GPS-based mileage charges, horsepower taxes, engine displacement taxes, and that's only a sample. Every single one of these measures is possible and practical, but would face intense opposition on the basis of regressiveness, invasion of privacy, erosion of business competitiveness, and unintended consequences. Anyone wishing to take on short-term transportation fuel demand won't lack for policy tools, but they'd better be tough and determined.

It's no surprise that politicians have largely steered clear of these thorny measures, as described in today's Washington Post, though it's less obvious that many of them truly understand what they're foregoing. Trying to change Corporate Average Fuel Economy standards and introduce incentives for new automotive efficiency technologies has hardly been a walk in the park, politically, but the impact of improving the gas mileage of some of the 16 million new cars bought each year pales in comparison to changing the way all 230 million cars on the road today are used, more or less immediately. But if incrementalism is all we're left with, there are some fine technology options, including hybrids and plug-in hybrids, about which we've heard a great deal recently, and the new diesels, about which we should hear much more, shortly.

Every carmaker in the European market, including GM, Ford and Daimler-Chrysler, offers superb diesel engines that produce performance quite similar to gasoline engines, but burn about 30% less fuel. Consider Honda's Accord i-CTDi, featured in the New York Times this week. This car capitalizes on the ultra-low-sulfur diesel fuel that is now required across the US, along with some very clever engine tweaks and catalyst chemistry, to deliver gas-like performance in a 40+ mpg, stylish-yet-affordable package. And while there are lots of smaller improvements that are possible with existing technology, 40 mpg is about the minimum new-car mileage improvement necessary to shift average US fleet fuel economy (currently 20 mpg, including SUVs) by enough to affect our oil imports within a decade.

European-style diesels offer two important advantages over hybrids. First, because their cost premium over standard gasoline cars is lower than that of hybrids, they could become mass-market much quicker. Toyota hopes to sell 60,000 Hybrid Camrys within a few years, but we'd need millions of hybrids or diesels, soon, to make a material difference in our total oil consumption. We know this level of market penetration is possible, because European diesels captured half the new car market in roughly a decade. When I shopped for a new car two years ago, the Passat Diesel was on my short list and dropped out mostly due to lack of availability.

The other nice feature of diesels is their ability to run on some of the most interesting petroleum substitutes out there. That includes blends incorporating biodiesel, which many see as a better alternative than ethanol, but it also includes the ouput of gas-to-liquids and coal-to-liquids processes. We'd need fewer highly-efficient cars running on low-petroleum or non-petroleum fuels to move the needle on imports. Would the Congress or Administration be willing to give diesel cars the same kind of tax incentives that they have provided to hybrids, or better yet, broaden incentives to cover all high-efficiency options? That's what it would take to make a real dent, if consumption remains untouchable and we must go by the "slow road."

If we're serious about energy security, then this is a big part of what it must look like: large numbers of Americans driving large numbers of ultra-efficient cars that leverage their use of petroleum with biofuels or synthetic fuels, driving a lot less, or both. Achieving that won't be easy. Price tag? Maybe a couple hundred billion dollars over 10 years, compared to an oil import bill over that period of $1.5 Trillion, even at $40/barrel.

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